Good News From FERC

No action needed by either of you. You can ignore this if you like. The i=
ssue is really complicated and I've tried to summarize it. I'm not sure ho=
w closely the two of you have been tracking activities at FERC. We had an =
interim victory late last week on the chargeback issue. =20

As Edison and Pacific Gas were defaulting on PX and ISO payments in January=
and February, the PX attempted to invoke the charge back section of its ta=
riff. This had several strange outcomes. First, the PX attempted to recov=
er the short payments by Edison for December activity by charging PX market=
participants based on a three month rolling average of gross sales. If th=
e PX owed a supplier money, they simply short-payed by the prorata amount. =
If the market participant owed the PX money, the PX added it to the partic=
ipants bill. This created a series of short pays and chargebacks. If a ma=
rket participant who received a chargeback bill didn't pay (e.g., PG&E for =
SCE's December PX activity), the PX would then allocate that amount (via sh=
ort pays and chargebacks) to other participants. This iterative process wo=
uld continue until credit-worthy participants shouldered the burden. The P=
X attempted to us an equally bizarre method to allocate defaults by the uti=
lities on their ISO RT energy bill (the PX is the Schedule Coordinator for =
the utilities and handles payments to the ISO for RT energy on behalf of th=
e utilities). Rather than shortpaying suppliers to the ISO for defaults by=
the utilities on RT energy charges, the PX attempted to collect this money=
from its participants in order to pay the ISO -- that is sellers into the =
PX Day Ahead market were supposed to pay SCE's and PG&E's RT ISO bill. Thi=
s was done via a chargeback. This led to our "last man standing" theory, w=
hereby the PX would iteritively chargebacks until a few credit-worthy entit=
ies were stuck with PG&E and SCE's defaults in both the PX and ISO markets.

FERC granted market participants some relief on Friday. They directed the =
PX to (1) rescind all chargebacks and (2) refrain from taking any future ch=
argebacks. They found "the chargeback provision in the PX tariff was not d=
esigned to address default of this magnitude and, thus, its application in =
these circumstances is unjust and unreasonable." This is not the last word=
on this matter. There are a variety of state court cases that impact this=
, and, of course the bankruptcy judge will weigh in as well. However, this=
is a solid victory for us as FERC has sided with us rather than the PX wit=
h respect to interpreting the PX tariff for defaults.